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O Is For Offer in Compromise.

When you owe a debt to the IRS, there are a few ways that you can handle it. Most commonly, you can enter into an installment agreement; under an installment agreement, you agree to pay off your debt over a period of time.

If you can't pay the full debt, you might consider an Offer in Compromise (OIC). An OIC allows you to resolve your tax obligations for less than the full amount you owe.

You generally submit an OIC because one of three things apply:

1. You don’t believe you owe the tax;

2. You can’t pay the tax; or

3. There is no doubt that you owe the tax nor that you could pay it, but an exceptional circumstance exists (this is generally an equity argument).

You'll also need to submit a non-refundable fee of $150 and payment made in good faith. The payment, which is also nonrefundable, will either be 20% of the total offer or a monthly installment; the amount you actually pay will be based on the type of OIC you submit. Exceptions to the fee and the installment do exist. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The IRS will examine your application and make a decision based on a number of things. The IRS will consider the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income (including future earnings attributable to accounts receivables and the like) and your expenses; the IRS uses a formula to determine whether the expenses you submit are reasonable. The IRS will also consider the amount of equity you have in assets that you own; this would include real property as well as personal property (like automobiles) and bank accounts.

The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. This is where your story - facts and circumstances - comes into play. At the end of the day, there's a formula that the IRS uses to figure how much they think they can collect from you. There is some wiggle room - examples include a demonstrable period of decreased earnings and special medical conditions - but those are the exception, not the rule.

You must be compliant in order to file an OIC. That means that you must have filed all of your tax returns and paid off any liabilities not subject to the OIC. Additionally, you cannot currently be in an open bankruptcy proceeding.

While your OIC is pending, there's still work to be done. You'll need to continue to timely make any payments associated with the OIC. You'll also need to stay compliant: don't fail to file a return or skip a payment.

You should be prepared to be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests; the lien will generally stay in place until your tax obligation is satisfied.

You can imagine that, in a tough economy, the IRS is in receipt of more than a few OICs. That means that they're busy. And that means that you're going to have to wait. Silver lining? Your OIC will be automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.